Is “China’s Shopify” Losing Momentum?
Baozunit’s (NASDAQ: BZUN) Shares recently stumbled after the Chinese e-commerce service provider continued its second-quarter earnings with a weak third-quarter outlook.
Baozun’s revenue rose 26% year-on-year to 2.15 billion yuan ($305 million) in the second quarter, beating estimates of $4 million. Its adjusted net profit jumped 73% to 146 million yuan ($20.7 million), or $0.35 per ADS, which also beat expectations by $0.11.
But in the third quarter, Baozun expects revenue to grow only 16% to 20% annually, well below expectations of 24% growth. Does this perspective point to Baozun, who is often referred to as the “Shopify of China”, is losing momentum?
A balanced game in the Chinese e-commerce market
Baozun helps businesses establish an online presence in China with e-commerce websites, fulfillment services, IT services, marketing campaigns, customer service tools, and more.
But unlike his Canadian Peer, Shopifywhich generates the bulk of its revenue from small and medium enterprises, Baozun primarily serves multinational enterprises such as Starbucks and Nike. Chinese e-commerce giants Ali Baba (NYSE: BABA) and JD.com (NASDAQ: JD) are also integrating Baozun’s services into their online marketplaces.
Baozun originally filled traders’ orders with a capital-intensive “distribution-based” model. However, it has gradually replaced this model with its higher-margin “non-distribution” model, which allows merchants to ship their products directly to consumers. Baozun’s forerunner advantage in e-commerce services, its diverse base of large customers and its continued expansion of margins have made it a well-balanced game in the booming Chinese e-commerce market.
Shooting on all cylinders
Baozun’s numbers improved across the board in the second quarter. Its gross merchandise volume (GMV), or the value of all goods sold on its platform, has grown 31% annually — an acceleration from its 18% growth in the pandemic-hit first quarter.
Within this total, Baozun’s non-distribution GMV (92% of its total GMV) increased by 34%. Its distribution GMV (8% of its GMV) only increased by 9%. His take-up rate, or the percentage of each sale he keeps as service revenue, fell from 9.7% to 10.4%.
Healthy growth in its non-distribution business, along with tighter cost controls and a rising underwriting rate, drove its year-over-year operating margin up 6.1% to 8.7 %.
Baozun’s total number of GMV brand partners also increased by 19% year-on-year to 241. Baozun generated robust GMV growth through fast-moving sportswear, luxury goods and consumer goods brands. , and he noted on June 18 promotional period (originally launched by JD as an annual sale) increased sales of its weakest menswear and womenswear brands in the quarter. This growth was partly offset by weaker consumer electronics sales.
But is Baozun losing momentum?
Baozun expects its GMV to grow only 15% annually in the third quarter. He attributes the deceleration to seasonal declines in some markets and his continued slowdown in the consumer electronics market.
Specifically, Baozun is moving away from lower-margin electronics brands, which could generate higher GMV growth, to higher-margin electronics brands, which typically generate slower GMV growth. During the second quarter results conference call in mid-August, CFO Robin Lu said the adjustment was necessary to generate “more profitable GMV” and increase margins over the long term.
Baozun has already started this change in the second quarter. As a result, its gross margin on product sales contracted 310 basis points year-over-year. Baozun also attributes the decline to a higher mix of new brands and higher discounts (especially during the June 18 campaign) after the COVID-19 crisis.
However, Baozun more than made up for this contraction in gross margin with the aforementioned expansion of its operating margin – which underpinned its big profits.
Limited visibility for now
Baozun’s growth will slow in the third quarter, but it did not provide clear information on the fourth quarter, which will include Alibaba’s annual “Singles Day” sale on Nov. 11.
Lu noted that there would be a seasonal lull, exacerbated by the aftermath of COVID-19, between the two shopping holidays of June 18 and November 11. In other words, Baozun could follow a lackluster third quarter with explosive fourth quarter numbers. Wall Street forecasts, which predict Baozun’s fourth-quarter annual revenue growth of 28% and a doubling of its profits, favor this bullish scenario.
Analysts expect Baozun’s revenue and profit to rise 25% and 55%, respectively, for the full year – which are stellar growth rates for a stock that trades at just 28 times the forward earnings.
A growth stock still undervalued
Investors should always be wary of analyst forecasts, but I think the market overreacted to Baozun’s Q3 forecast. Baozun provided clear explanations for the slowdown, and its disciplined focus on expanding its margins should be praised rather than punished.
I think Baozun’s slowdown will be temporary and its growth should pick up again in the fourth quarter as Singles Day brings buyers back. Baozun’s stock looks cheap relative to its growth, and its post-earnings drop could represent a great buying opportunity.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.